Geez, if you can’t trust your hard-earned millions with the guy whose audiotape on financial success you just bought off the Barnes & Noble clearance rack for $3.99, then who can you trust?

Pity poor Dominick Vincentini. He invested nearly $2,000,000 with Keith Anderson, creator of the “Gateway to Financial Freedom” audiocasette series, and was promptly robbed blind. The irony here of course, is that if you’ve got a couple million to burn on misguided investments, I’d argue that you already enjoy more financial freedom than you likely deserve.

If this is possible, things went from bad to worse for Vincentini last week, when the 6th Circuit denied his appeal of his earlier Tax Court decision, holding that Vincentini was not permitted a theft loss deduction related to the stolen funds. The crux of the case was not whether a theft had occurred, but rather the timing of the theft, with the Tax Court ruling that Vincentini still maintained a reasonable prospect of recovery in the year he deducted the stolen funds.

From the 6th Circuit:

In 1999…Vincentini decided to invest in two of [Anderson’s] programs: the Loan Four Program and the Look Back Program. Vincentini claims that he was promised annualized returns of 30 to 50 percent. All told, he invested $800,000.00 in the Loan Four Program [along with $950,000.00 in the Look Back Program]. In reality, however, the loans affiliated with the Look Back Program were illusory; AAA simply used the fake loans to generate and then steal from investors the “fees” needed to obtain the fictional capital.

Andersen and his cronies were arrested in 2001 and convicted in 2002 for running their Ponzi scheme, and ordered to pay restitution to their bilked investors. These events “fixed” the presence of a theft loss for Vincentini, but that is only part of the two-prong test for taking a deduction. Did Vincentini also make enough of an effort to recover his stolen money to satisfy the following requirement of Treas. Reg. 1.165-1(b):

If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received.

By May of 2001, Vincentini was actively trying to withdraw his investment from the Loan Four Program. There were also phone conferences between the investors and Costa Rican attorneys exploring whether to begin legal proceedings against the principals of AAA. Although Vincentini states that he participated in at least one of these conferences, he ultimately chose not to retain legal counsel to pursue his money because he thought such efforts to be in vain. Vincentini further says he tried, unsuccessfully, to withdraw his investment from AAA by submitting several “directives” to Kuzel and other principals requesting the release of his funds.

Unfortunately, these efforts were not enough to convince the Tax Court or the 6th Circuit that a reasonable prospect of recovery did not exist at the end of 2002:

At trial he declined to offer anything more than his own testimony to show that at the end of 2002 there was no reasonable prospect of recovery. Even though Vincentini testified that he had both sent written requests to officials from AAA demanding the return of his money and participated in conference calls with Costa Rican attorneys, such statements were uncorroborated and self serving. That Vincentini did not say that he subjectively believed that there was no reasonable prospect of recovery further supports the Tax Court’s ultimate conclusion.

Based on this reasoning, the 6th Circuit upheld the Tax Court’s denial of the theft loss. The result seems particularly harsh, as by the end of 2002 the responsible parties had already been convicted. The 6th Circuit maintained, however, that even with the convictions Vincentini could have attempted to recover his money through court-ordered property forfeitures or other restitution.

What’s the lesson here? Far be it for me to stereotype, but I wouldn’t expect a man named Dominick J. Vincentini to passively succumb to the theft of $2,000,000. But he did, and it backfired on him in the form of a denied theft-loss deduction. And while case law has established that “you need not refrain from taking a loss deduction simply because there exists a remote or nebulous possibility of recovery,” it would certainly appear that you’ve better be preared to prove that you’ve exhausted every avenue of recovery prior to deducting the stolen funds.

The items in this blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. A select group of Tax Professionals of WithumSmith+Brown write Double Taxation, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown.

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